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Monday, May 21, 2012

Housing may be perceived to have gotten very expensive at the current sky-high levels, but data compiled by mortgage giant HDFC Ltd shows that home prices are near their most affordable level in over three decades.

The home prices have indeed been rising for more than 10 years, except for a temporary slump in 2009, but the ’affordability’ of purchasing a house has been mostly on a declining trend for almost two decades now, as per HDFC data.

Affordability ratio

This affordability ratio, which takes into account the annual income of the home buyer along with the price of the house, declined to 4.6 in the previous fiscal, ended March 31, 2012, from as high as 22 in the year 1995.

This means that a home buyer, on an average, needed an amount equivalent to nearly 22 times his or her annual income in 1995, but now an amount less than five times of the annual earnings was required for purchasing a house.

The HDFC data, released in an investor presentation for its financial results for 2011-12, shows that affordability ratio of 4.6 in the last fiscal was the third lowest ever figure after 4.3 in the year 2004 and 4.5 in 2009.

“The reason why property prices are still affordable, despite steady increase in property prices over the years, is that income levels have also risen during this period along with added tax benefits on housing loans,” HDFC Ltd Managing Director Ms Renu Sud Karnad told PTI.

“The cost of a house as a multiple of the annual income of a borrower is currently estimated at 4.6 times which is almost the lowest ever in the last three decades,” she said.

“In other words, today it takes about 4.6 years’ income to buy a house. As long as that ratio stays in the range of 4.2-5.5 times, housing loan demand will be there,” she added.

Loan to value ratio

Ms Karnad further said that HDFC’s average loan amount this year is Rs 19.5 lakh and loan to value ratio at origination is 65 per cent.

“So the property value for these loans will be somewhere around Rs 30 lakh, which is affordable in today’s context,” she noted.

As per the historic data, the average annual income of a home buyer has crossed Rs 10 lakh level now, marking a sharp jump from about Rs 2-3 lakh about ten years ago.

The average home price has also risen during this period, but the surge has been relatively less sharp from about Rs 15 lakh to near Rs 30 lakh.

Tax benefits

In addition to a sharper growth in income levels, the larger tax benefits have also helped make the home purchases more affordable for the buyers.

Taking into account various tax incentives, the effective rate of interest on a home loan has come down to 7.1 per cent currently, from a high of 11.6 per cent in the year 2000.

This takes into account a decline in nominal interest rate from 13.25 per cent in 2000 to 11 per cent in 2012, as also increase in maximum deduction for interest from Rs 75,000 to Rs 1.5 lakh and an increase in deduction limit on principal amount from Rs 20,000 to Rs 1 lakh, HDFC said.

Price trend

Ms Karnad further said that “one positive trend that must be noted is that 46 per cent of the new residential units launched across Indian cities in the second quarter of calendar year 2011 were in the Rs 2,000 to Rs 3,000 per square feet range.

“This is a reversal of trend as compared to the fourth quarter of calendar year 2010 and the first quarter of calendar year 2011, wherein most of the residential launches were in the Rs 3,000 to Rs 4,000 per square feet range,” she said.

As per HDFC’s FY-12 numbers, there is still very good demand for properties in certain metros like Chennai, parts of Delhi NCR, and Bangalore.

Also, the Tier-II and Tier-III cities and some larger towns like Pune and Chandigarh have been doing well.

“The reason is property prices in these towns are still affordable. We give loans to middle income borrowers who are looking to buy a house so that they can stay there. These borrowers are not investors or speculators,” Ms Karnad said.

Interest rates

“Interest rates seemed to have topped out and should start moving down in next 6 months. Since over 80 per cent of the customers take floating interest rate loans, they will benefit from the downward movement of interest rates,” she added.

“In Mumbai, buyers have clearly adopted a wait and watch stance while developers are unwilling to relent on prices citing reasons of inflation, higher interest rates and increased raw material and labour costs,” she said, adding that a moderate price correction could see home buyers back.

Ms Karnad also said that the issues arising out of crisis in Europe were unlikely to affect the home purchases.

“What happened in 2008-09, when the global meltdown led to a huge uncertainty all over, be it the economic growth and its impact on jobs, confidence levels among people at large etc, nothing of that magnitude is being envisaged now. I do not think the current issues especially in Europe would have any major impact on one’s decision to buy a property through a home loan,” she said.